Why Mobile App Install Ads Are Suddenly Such a Huge Deal

Well, of a sort. When it comes to the rush to advertise on mobile devices, it's not exactly car, beer and packaged goods brands leading the charge. Rather, game developers are using advertising to drive thousands of users to download their games, mobile ad experts say. That trend is a major reason why Facebook mobile ad business has skyrocketed from zero a few years ago to 59 percent of its ad revenue in first quarter, as reported on Wednesday.

Indeed, the popular narrative is that Facebook launched its mobile ad products and all the big brand advertisers followed. But in reality, it's mobile game companies that are driving mobile ad revenue growth on Facebook at an unrelenting pace.

That's why, if you use Facebook. you'll likely frequently see ads featuring "games you may like." These ads encourage users--many off whom are accessing Facebook from mobile devices, to download games directly to Facebook. Facebook executives have acknowledged the importance of mobile game ads during the company's past several earnings calls.

According to mobile gaming experts, while the average advertiser might pay 10 to 20 cents for ads on Facebook, game developers pay Facebook $1 to $2 per ad.

For very targeted mobile game ads, some game companies are willing to pay as much as $8, $10 or $20 per ad. That means, more often than not game advertisers end up soaking up most of the demand on Facebook.

"This is big business," said Craig Palli, chief strategy officer at the mobile app marketing company Fiksu. "Our company is spending many millions a month on mobile app install ads for clients. Some game companies are spending $10,000 a day on marketing. And we’re not just talking indy studios. it’s King Digital [makers of the mega hit Candy Crush Saga] , it's Zynga, it's Disney., It’s Warner Bros. These are major household brands, and they're spending millions of dollars per month marketing their games."

Why are these companies paying such high prices to get users to download their games? Because a certain subset of mobile games--the whales, in Las Vegas parlance--are inclined to spend boatloads on extras within these games, like extra lives, in-game currency, weapons, and many other virtual items.

Some gamers will spend $50 on a single game, said Mr. Palli. In more elaborate titles like Game of War, that number can climb as high as $100 in a single weekend. Therefore, spending a few bucks to reach a single user is plenty worth it. And Facebook, given its precise targeting options, is particular good at reaching those big spenders, say gaming ad experts. On Wednesday, the company announced it had a billion mobile users worldwide.

"They know how to route the right users to the right game products," said Walter Driver, CEO of the mobile gaming company Scopely.

"Even thought maybe 5 percent of game users convert to spend money, they make an entire ecosystem profitable," said David Edri, vp of Engage, a division of the digital ad buying firm RadiumOne. "It’s unbelievable."

Mr. Edri said that money continues to pour into gaming, and Facebook's prices are going up in some cases as high as $8 to $10 per game install.

All this helps explain why Facebook is launching a mobile ad network, why Twitter is doing the same, and why Yahoo has begun testing mobile 'app install ads.' They all want in on that ad pile. Even YouTube is starting to run ads for mobile game installs.

Mr. Edri sees a Facebook mobile ad network as ideally timed, and plenty of room for Yahoo, Twitter and others, assuming their ad environments prove as suitable to downloading games as Facebook's. "They all have first party data, and that's key," said Mr. Edri. "And it's not like you have to go and sell to these game companies. They'll go and test anyone."

As for the other big question, given the way that social gaming collapsed on Facebook (see Zynga's struggles in recent years), can this party last? Or won't mobile gaming eventually peter out? Or will these companies run out of high spending whales?

Not surprisingly, gaming experts say no. "I don’t think so," said Mr. Driver. "There is still a huge segment of the market that is not playing games at all right now but will be in the future. The smartphone and tablet markets are still growing rapidly. You'll see this market grow for years to come."

Mr. Edri said he could see the market eventually becoming saturated, but not any time soon. Plus, there are two million apps in Apple's app store alone, meaning to get noticed, game developers have to market their games or risk getting lost.

One strange side effect of all this game money. Big brands may find themselves shut out of some key mobile ad inventory. "Brands are just getting introduced to mobile, and we've just now seen some demand." But as for brands paying more for mobile ads than ROI-obsessed game companies. "I don’t see it happening," Mr. Edri said.